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Busch: GM A Sign O' The Times

With GM about to experience the vagaries of bankruptcy court, the pain process of debt deleveraging and job losses begins. This is necessary and is indicative of where we are in the ultimate end game for the economy. The same can be said for all of the PMI's (purchasing manager indexes) globally. We have seen extreme low levels of orders and activity in the first quarter. With the Chinese/US/Eurozone loans/stimulus/quantitative easing, we are now rebounding. Perhaps the best news today, the UK had flat home prices for the first time in 20 months.

Another way to look at the rebound picture and stock market rally would be centered solely around expectations for the Federal Reserve. In "normal" recessions, the Fed would be easing and the stock markets would rally. The yield curve would steepen and encourage bank lending. The economy would rebound and the Fed would halt the easing. The stock markets would then go sideways or continue to rally until the Fed put on the brakes and the yield curve would flatten. Yes, this is a massive simplification.

But look at what is happening now. There is massive, massive monetary stimulus from Fed support programs to extremely low interest rates to quantitative easing. Also, the Chinese have lent out their entire year's target of loans in the first four months of the year. Money is sloshing through the system, but has yet to find a home in new lending with money velocity at low levels. However, the money is finding a home in commodities with oil and gold surging. The US Treasury market is getting cold feet as yields have increased over 75% (2.10% to 3.75%).

This is important as the markets are betting that the Fed will not pull back the stimulus fast enough to offset the inflationary impact. Let's face it, the central bank doesn't have a good track record of raising interest rates in anticipation of an economic rebound. With the tenuous state of the US banking system, there's very little chance they will do it now. This is the ultimate timing green light for the equity markets: huge stimulus, little inflation, and little chance the Fed will take the party bowl away.

Will there be a price to pay for this profligate monetary stimulus? Or better, will there be a price to pay for the massive government debt issuance and the massive amount of US dollars in the monetary system? Bets are being taken now by Black Swan author Nassim Taleb as he starts his own hedge fund targeted for hyper inflation in the world. While Geithner and Bernanke hope he's wrong, my guess is that he'll raise a large amount of money and he'll not be alone.

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Andrew Busch
Andrew Busch

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter at http://twitter.com/abusch .

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